The Barings crisis in Argentina: the role of exogenous European money market factors

Abstract

The Barings crisis of 1890 was a wrenching financial crash and recession for Argentina. The episode is similar in many respects to the balance of payments difficulties in emerging markets during the 1990s. In particular, it serves as an example of the dangers of investment that is exogenous to the capital-importing, developing country, as opposed to investment driven by country-specific conditions. While some external factors, such as competition among European merchant banks, have been examined for their role in pushing capital into the South American nation, no paper has yet examined the specific conditions in European money markets as the boom began. This paper fills that gap. An examination of financial variables reveals that returns were low and financial investment opportunities few in England, which motivated capital to leave the country. This situation resembles the early 1990s, when interest rates were low in the USA and Japan, and capital went to emerging markets in search of higher compensation. Likewise, British interest rates and other indicators were low in the 1880s, providing motives for capital to go abroad. These incentives were sufficiently strong that warning signs from Argentina were ignored, thus leading to the crash.